Vehicle ownership and maintenance represent significant expenses for business owners. Depending on the type of business, owning company-specific vehicles isn’t always feasible. Many small business owners and self-employed people use the same vehicle for professional and personal purposes.
If you are a business owner in this situation, you may be able to offset some of these operating costs by writing them off as tax-deductible business expenses. Learn about your options on how to write off car expenses for business.
Business Car Write-Off: Do You Qualify?
According to the Internal Revenue Service (IRS), three primary categories of taxpayers can legally claim a business vehicle tax write-off on vehicles they personally own: business owners, self-employed individuals, and specific types of employees.
Qualifying business owners and self-employed individuals include sole proprietors of Limited Liability Companies (LLCs), S corporations, or any other entity with a tax classification enabling income pass-through on a Tax Form 1040.
You may also qualify if you are an employee in any of the following situations:
- Reservist in any branch of the Armed Forces
- Qualified performing artist
- Fee-basis public official working for a local or state government
The IRS definition of a luxury vehicle is based on specific vehicular features, not the price you paid for the vehicle. According to the IRS, a luxury vehicle is any automobile with four wheels with an unloaded gross weight under 6,000 lbs. used primarily on public roads. This legal definition covers most vehicles on the road, including most personally-owned cars and trucks.
What Counts as Deductible Vehicle Expenses?
Business owners and self-employed individuals using a personally-owned vehicle as a company car can only deduct the costs incurred during business use. The following count as deductible vehicle expenses.
Vehicle depreciation measures a vehicle’s declining value year after year as it accumulates wear and tear. When used for business purposes, cars, including personally-owned cars used for business, can be depreciated over a 5-year period.
However, the IRS imposes depreciation caps on luxury vehicles purchased after December 31, 2017:
- Up to $10,000 after 1 year (or $18,000 after claiming 100% bonus depreciation)
- Up to $16,000 after 2 years
- Up to $9,600 after 3 years
- $5,760 for each subsequent year
Exceptions include vehicles that do not meet the IRS’s definition of a luxury vehicle. For example, an SUV with a loaded weight of 6,250 lbs. is not considered a luxury vehicle, allowing a business owner to expense 100% of the vehicle’s cost.
Vehicle expenses are only deductible when using the vehicle for what the IRS considers business driving. The following expenses do not count as such and are therefore non-deductible:
- Any expenses incurred when driving for personal purposes (e.g., traveling, leisure, vacations, etc.)
- Commuting expenses: the IRS does not consider the commute to and from a workplace to be business use, regardless of the distance between your home and the workplace.
- Expenses incurred during business materials transportation while commuting (e.g., company computers, archives, office equipment, etc.)
- Expenses incurred when using the vehicle as an advertising platform (e.g., advertising signage on the car)
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Standard Mileage Rate vs. Actual Expenses
If you use your personally-owned vehicle for business, calculating your vehicle’s percentage of business use as accurately as possible is critical.
You can use one of two methods to track your vehicle’s business usage and determine the business vehicle tax write-off: the IRS standard mileage rate method or tracking actual vehicle expenses.
Standard Mileage Rate
The standard mileage rate method calculates your vehicle’s business usage based on the number of qualified business miles driven.
As of 2022, the IRS’s standard mileage rate for business mileage deductions is 58.5 cents ($0.585) from January 1 to July 30 and 62.5 cents ($0.625) from July 1 to December 31.
Alice calculates that she has driven a total of 19,000 miles in 2022. 11,400 miles (about 60%) were business miles driven before July 1. Since she drove all her business miles before the standard mileage rate increase, she calculates her tax deduction using only the $0.585 mileage rate.
- At the standard 2022 rate, 11,400 miles multiplied by $0.585 equals $6,669, meaning Alice is entitled to a tax deduction of $6,669.
Due to the rate hike applicable from July 1-December 31, 2022, Bob must calculate the number of business miles before and after July 1, 2022. During the year, he drove 22,000 miles, of which 14,300 (65%) were business miles. Bob calculates that he drove 7,300 miles before July 1 and the remaining 7,000 afterward.
- At the 2022 standard mileage rates before and after the hike, the calculation needed is (7,300 x 0.585) + (7,000 + 0.625) = 4,270.5 + 4,375 = 8,645.5. In other words, Bob is entitled to a tax deduction of $8,645.50.
What are business miles?
A business mile is any full mile you drive during business hours or for professional purposes.
Some of the most common examples of a business mile include the following:
- Driving from your primary office to another office location
- Miles driven while transporting business passengers (e.g., taxi, ride-sharing) or packages (e.g., courier services, pizza delivery, etc.)
- Trips from the office to supplies stores, banks, post offices, restaurants (e.g., business lunches), or client addresses (e.g., meeting clients in person during business)
Business miles do not include the distance driven when commuting to and from work, or any miles driven for personal purposes (e.g., errands, personal purchases), even when conducted during business hours.
Charlie lives 3 miles from his office and must meet a client based 11 miles away from the office during the day. Charlie’s total trip length for the day is 28 miles: 3 miles to drive to work, 11 to drive to the client’s address, 11 to return to the office, and 3 to drive back home. Of these, the 6 miles spent commuting to and from work are non-deductible. Only the 22 miles spent driving from the office to the client’s address and back qualify as business miles.
Actual Vehicle Expenses
Actual vehicle expense tracking is a calculation method based on the amount of money spent operating or maintaining your vehicle for business use.
While this method also requires you to track the exact number of personal and business miles driven, it allows you to claim specific expenses as tax deductibles.
Examples of deductible vehicle expenses include the following:
- Oil changes
- Tire replacement
- General maintenance and repair costs
- Registration fees
- Rental or lease payments
- Vehicle loan interest payments
- Parking fees
- Garage renting fees
When using this method, the number of business miles driven is used to determine the percentage of business use. To obtain the deduction amount, multiply the sum of actual vehicle expenses by the business use percentage.
Dan drove 20,000 miles in 2022, of which 14,000 (70%) were business miles. His vehicle expenses include $6,200 on gas, $1,200 on general maintenance, $400 in parking fees, and $120 in oil changes, for a total of $7,920. His vehicle is an older model and ineligible for a depreciation deduction, so he cannot add depreciation to his vehicle expenses.
- Dan first determines his business use percentage by dividing his business miles by total miles (14,000/20,000=.7=70% business use). He then multiples his total vehicle expenses by the percentage of business use ($7,920 x .7=$5,544). Dan is eligible for a tax deduction of $5,544.
Eri purchases a new sedan at the beginning of 2022. She drives a total of 16,000 miles with it by the end of the year, 10,000 (62.5%) of which are business miles. Her vehicle expenses include $5,000 on gas, $600 in parking fees, $32 in registration costs, and $10,000 for first-year depreciation. The total expenses for this vehicle are $15,632.
- $15,632 multiplied by 0.625 equals $9,770, meaning Eri is eligible for a tax deduction of $9,770.
Maintaining and organizing driving and expense records as thoroughly as possible is crucial for any business owner or self-employed individual. If your tax return is selected for an IRS audit, well-kept records allow you to support your deduction claims and help you avoid penalty or interest assessments. If you receive a notification that you are being audited, contact Tax Shark for help preparing your tax audit defense.
Here are a few examples of records and information you should keep:
- Canceled checks
- Other proof of purchase
- Mileage logs with complete details (dates, trip lengths, origins and destinations, trip purposes).
Should I Use the Standard Mileage Rate or the Actual Expense Method?
Although you can choose either method to track your vehicle’s business use and expenses, selecting the right method can result in better tax deductions, helping you save more money. While all business owners and self-employed individuals have different needs, knowing your personal driving habits can help you to determine which method is appropriate for you.
If you need help determining the best method for your business, contact a business tax planner for tax advice so you can benefit from the most recent tax regulations and make the right decisions when it comes to saving your company money.
According to the Federal Highway Administration (FHWA), the average distance driven per year is 13,476 miles per driver. Although the number varies depending on the driver’s age, sex, and occupation, most Americans drive 10,000 to 15,000 miles per year.
Average vehicle expenses per vehicle per year are:
- Yearly fuel consumption: According to the American Petroleum Institute: 489 gallons per registered vehicle, representing approximately $1,828.86 of fuel expenses per year (based on the AAA national average of $3.74 per gallon, as of September 2022)
- Yearly oil expenses: $100, assuming 2 oil changes per year and an average oil change cost of $50
- Yearly car repair expenses: According to Consumer Reports, $208 for 2017 model year cars
- Yearly insurance costs: According to MarketWatch, $1,730 for full-coverage insurance
- Depreciation costs: Approximately $3,500, assuming an average 3-year-old vehicle with a sticker price of $20,000.
- Miscellaneous yearly costs: Approx. $150 on registration and other fees
The vehicle’s average operating and maintenance costs are about $7,500, including depreciation.
When to Use The Actual Vehicle Expenses Method
If your yearly miles driven are below the 13,476 miles average, the actual vehicle expenses method may be the better choice, especially if your vehicle is relatively new.
Example: An average driver records 10,000 total miles in 2022, and 5,000 are business miles spread evenly throughout the year (2,500 before July 1 and 2,500 after). Under the standard mileage method, this driver is entitled to approximately $3,025 of tax deduction:
- (2,500 x 0.585) + (2,500 x 0.625) = 1,462.5 + 1,562.5 = $3,025
If that driver uses the actual vehicle expenses method (assuming statistical averages of $7,500 listed above and 50% business usage), they can expect a tax deduction of $3,750, or $725 more than with the standard mileage method.
- 7,500 x 0.5 = $3,750
When to Use The Standard Mileage Rate Method
If you drive many miles each year, the standard mileage rate method may be more advantageous for you, as the number of miles driven may be high enough to result in a higher deduction than the actual expenses method.
Assuming the statistical average of $7,500 in yearly vehicle expenses and the 2022 IRS rates, the minimum number of business miles required to obtain a $7,500 tax deduction is approximately 12,397.
Assuming average vehicle expenses, if your number of business miles exceeds 12,397, you will get a higher deduction with the standard mileage method.
Example: A frequent driver records 13,000 business miles in 2022, spread evenly throughout the year (6,500 before July 1 and 6,500 after). Using the standard mileage method, this driver is entitled to $7,865 in tax deduction or $365 more than the average expenses method.
- (6,500 x 0.585) + (6,500 x 0.625) = 3,802.5 + 4,062.5 = $7,865
Can I Write off a Vehicle Purchase for Business Use?
Using a Section 179 deduction, you can write off all or part of a vehicle purchase as long as the vehicle is new to you and used at least 50% of the time for business purposes. Qualifying vehicles include passenger vehicles, heavy SUVs, trucks, and vans.
Certain restrictions may preclude you from writing the vehicle off on your taxes. To be deductible, the vehicle cannot be purchased by or from a family member and must be put into use the same year you are trying to claim the deduction.
For an SUV to qualify for a business vehicle tax deduction, it must weigh between 6,000 and 14,000 lbs. Additionally, the deduction amount for SUVs is capped at a $26,200 deduction.
Tax Forms for Writing off a Vehicle for Business Use
When writing off a vehicle for business use, you will need to use the IRS form that corresponds to your business status. Form 1040, the standard form for filing a write-off, has different Schedules that certain business owners must complete. There are different Schedules for self-employed individuals, partners, or members of an LLC and those traveling for volunteer work or to medical appointments.
Partners and members of multi-member LLCs
Individuals traveling for volunteer work or medical appointments
Here are the answers to some common questions related to getting tax benefits from writing off car expenses during business use.
Yes, all car payments are tax-deductible as long as you use the vehicle for business purposes. If your vehicle is 75% for business and 25% for personal use, you can only deduct 75% of the car payments.
Yes, car lease payments are tax-deductible, as long as you are a business owner or self-employed individual. The same principle of business and personal use percentages applies.
No. The IRS categorizes any expenses incurred while driving to and from work as commuting expenses. The IRS considers all commuting expenses non-deductible.
Yes. A limited liability company (LLC) may write off 100% of a vehicle’s cost using a Section 179 deduction.